If you’ve read about the cash envelope system for budgeting, you recognize the genius in its simplicity.
The cash envelope system makes your budget come to life in a visual and tactile way. It helps you see your budget at work and how much money you have to spend with the help of envelopes and cold, hard cash.
The basics are this: you use one paper envelope per budget category. On payday, you get cash and stuff each envelope with the amount of money that is earmarked for that category. When the envelope is empty, you stop spending.
Simple, right? Well, yes and no!
The truth is there are a few things that make the cash envelope system clunky.
First, most of us aren’t used to using actual dollar bills and coins. Secondly, many stores prefer cards over cash. And third, most of us get paid by direct deposit, and going to the bank every payday to get cash for your budget isn’t very convenient.
The cash envelope system just isn’t as easy to use as the debit and credit cards that we are all used to.
But there is no need to throw the baby out with the bathwater! The cash envelope system has helped so many people stay on track with their budget.
To overcome all of the clunky parts of the cash envelope system, there is an alternative option…a CASHLESS envelope system for budgeting.
Is a cashless system still effective? (using debit cards, not credit cards)
If the point of budgeting by envelope is to rein in your budget with actual segmented cash, won’t debit cards defeat the whole purpose?
The answer is no. If you spend some time choosing a method and getting it set up, a cashless envelope system for budgeting can work just as well as a normal envelope system.
A cashless system using debit cards is not only doable, it is simple and effective once you get it started.
I’m going to teach you the ins and outs of how to keep all of the best parts of the envelope system for budgeting while using cards instead of cash.
How to set up a cash envelope system
First, you need to understand how to set up a cash envelope system (this is the same for physical envelopes or a cashless envelope system). If you already use the cash envelope system for your budget you can skip this section. We will get down to the cashless part next.
- Create a budget: Start by creating your budget. We use a zero-based budget in our household. Our budget planning started with writing down our take-home pay, then subtracting out fixed expenses.
We then assign every remaining dollar a job by allocating it into our budget categories including grocery, savings, Christmas sinking fund, transportation, debt payoff (and others). I share 139 different budget categories you should consider when creating a zero-based budget in this post.
When you are finished with creating your budget, your take-home pay minus your expenses should equal zero. By giving every dollar a category and job, you have complete control over where your money is going.
- Set up your envelopes: The next part of a cash envelope system is to create your envelopes. You want a place to hold the specific amount of cash you decided on for each budget category. You can use actual envelopes like these. I also love cash envelope wallets and share some of my favorite options in this post. If you are more interested in the cashless envelope option I will share how to set up your envelopes in the next section.
- Pay your bills first: When using a cash envelope system, the first thing to do after each payday is to pay all of your bills.
- Stuff your envelopes: Now, use the cash remaining in your budget and distribute the predetermined amount of cash to each envelope (budget category). For example, if I budgeted $400 for groceries each month, I would have one envelope labeled groceries and I would put $400 cash inside. (read below for the cashless instructions). As you spend money, be sure to use the cash from the appropriate envelope.
- Once the money is gone from an envelope, your spending on that category needs to stop.
- At the end of the month, evaluate your budget, and make necessary adjustments.
- Move the unspent cash from your envelopes into savings, use it to pay off debt, or roll it over to your next month’s spending.
How to set up a cashless envelope system
The same basic principles apply to a cashless envelope budgeting system. You still have specific amounts assigned for each budget category, but instead of using actual cash or envelopes, you will be using paper/electronic banking and debit card(s).
1)There are two options for a cashless envelope budgeting system: All of the money for your “envelopes” will be located in one checking account and accessed using the same debit card.
Your “envelopes” will exist in name only. Using a notebook, index cards, or your phone, you’ll keep track of how much money you have spent from each category. This requires vigilant work to keep your spending tracked and current.
This Budget Book would work great!
2) Create a checking account for each category of your budget and have your direct deposit automatically distribute your paycheck into the appropriate accounts.
This requires some upfront work (and the bank teller might look at you funny). This method is helpful because you can use category-specific debit cards for online purchases and/or automatic payments.
Although you might have 8 different accounts for our categories, you only need to carry around 3 debit cards each (groceries, business account, and personal account).
Use your bank app to check how much money you have in each account, or you could also use paper or your phone to track your spending.
If you are unsure which method of cashless envelope system would work best for you, I recommend trying option number one (with one account and one debit card) first.
If you have trouble with the tracking or would like the added convenience of being able to set up automatic bill pay, try out option number two (multiple checking accounts).
The beauty of the envelope system is that there are many different ways to do it. You can try all of them until you find a fit that helps you stay on budget the best!
Pros of the cashless envelope system
There are definite benefits to using the cashless envelope system:
- You don’t need to go to the bank every payday to get cash
- No worries about forgetting the correct budget envelope
- Spouses don’t have to split cash for overlapping categories like groceries or gas
- Cards are accepted nearly everywhere
- Debit cards can be used to set up online automatic bill pay for recurring bills
Cons of the cashless envelope system
However, the cashless envelope system isn’t all roses and rainbows. Some cons of the cashless envelope system include:
- Initial set up will take time (especially for the multiple account/cards option)
- It is harder to keep track of money spent when using paper
- The potential to overspend is greater with cards instead of actual cash that you can see and touch
Who should not use a cashless envelope system
If you are just starting out with budgeting, I would recommend using the standard envelope budget system until you get the hang of things.
There is something about seeing your money in envelopes (or lack thereof) that helps reinforce the need for this strict method of budgeting.
If, after a few months, you want the convenience of a cashless system, you can switch over. You’ll already have your budget categories created so it should be much easier.
The cashless version of the envelope system is not a good choice for overspenders UNLESS you are very detail-oriented and vigilant. Most debit cards have overdraft protection so it could get expensive if you aren’t careful to stay within your budget.
Final Thoughts on the Cashless Envelope Budget System
The envelope budget system is an amazing strategy you can use to get the pulse of your spending. It puts you in the driver’s seat of your spending instead of in a reactive position.
I love how it helps you to keep close tabs on your spending and learn how to stay healthily within those boundaries.
A cashless envelope budget system is a modernized version of this original genius idea. If digital tracking is more your style you will appreciate the simplicity and ease of using debit cards instead of carrying around several envelopes with cash inside.
If you are interested in using a cashless envelope budget system, I hope this post has given you the basic understanding of how to use an envelope system as well as some creative cashless methods for executing it. You can do this!
And if you need some extra help, be sure to check out my financial coaching services. I’m ready to help you step-by-step to success on your financial journey.